Democratic lawmakers have touted their efforts to defend Hawai'i consumers from high gasoline prices for years. Now, with less than two weeks to go before their primary tool for bringing prices down takes effect, it appears their strategy could backfire.

Starting Sept. 1 the state will have the nation's only gasoline price cap and it could actually lead to higher prices, at least temporarily.

That scenario seems increasingly likely because of a recent rise in Mainland prices — on which the gas cap is based.

If prices do rise, Democrats, who control the state Legislature, could face the brunt of public blame.

Lawmakers turned to a gas cap concept in 2002 after a state lawsuit accusing oil companies of overcharging consumers in Hawai'i was settled without the companies admitting any wrongdoing.

"Most of us have great faith in the marvel of the free competitive market. However, where there is little or no competition in a specific market, it then becomes the Legislature's duty to serve as a watchdog to protect against companies using their unchallenged status to excessively price their product," said Rep. Ken Hiraki, D-28th (Iwilei, Downtown, Makiki) in March 2002 as the gas-cap legislation was being proposed.

Now that it appears the caps may not bring prices down, Hiraki and other Democrats are pointing out that it can be abandoned or altered.

"If there is a problem, the governor has the power to suspend the law, or the (Public Utilities Commission) has the power to amend the law," said Hiraki, a key proponent of price caps. "There's nothing for legislators to do now. Our job was to set up the framework. The ball's in their court."

Last month the PUC, which administers the cap, wrote Gov. Linda Lingle and legislative leaders warning that price controls could lead to supply shortages and a refinery closure.

Economists and state consultants also have repeatedly warned that price caps could drive up prices.

While lawmakers said that price caps now are out of their hands, Lingle, who doesn't support the caps, said her hands are tied. Lingle contends the law passed last year only allows her to suspend the caps if there's a major adverse impact on the economy, public welfare, or the health and safety of citizens. In such a case the law would be suspended in part or entirely until the next legislative session.

Lingle would not comment at a news conference Thursday on what criteria might justify suspending the caps though she said she'll watch out for shortages and price hikes particularly in rural communities.

"We've been working hard internally to identify some thresholds that would create a certain kind of action or lack of action on my part," she said. "I can tell you that I won't hesitate to step in and stop it if I think it is hurting the economy or hurting public health and welfare.

"We're going to monitor it very closely day by day."

The state already has contingency plans for dealing with gasoline shortages that include allocating supplies specifically for the public safety sector. Additionally, the PUC can change the price cap regulations, if problems arise. However, Lingle said she would seek to suspend the law, if conditions allowed, rather than rely on contingency plans or the PUC to address problems.

"I'm going to use the authority given to me under the law, if I determined that there was a serious adverse impact on the economy, or the public health and safety," she said.

Given the risks of a gasoline shortage and price increase, one of Lingle's fellow Republicans thinks the governor should suspend the law immediately.

"We're talking about semantics and a subjective interpretation of the law," said Sen. Sam Slom, R-9th (Kahala, Hawai'i Kai). "I see major complications" from price caps. "I'm saying why do we have to go to that extreme? The governor, seeing all these things, should act and suspend it."

Several Democrats said even if the caps lead to higher prices in the early days, they may work to lower prices later.

"The price cap should be given an opportunity to work and it should produce significant savings to consumers over the long-term," said Sen. Ron Menor, D-17th (Mililani, Waipi'o), an architect of the price-cap law. "The long-term trend will be that as gasoline prices drop on the Mainland and worldwide, Hawai'i prices will also eventually go down.

"Even without a cap, gasoline prices in Hawai'i will continue to rise significantly when Mainland and global prices go up."

Menor and other lawmakers stress that the point of the law wasn't necessarily to lower prices, but to create prices that are more closely linked to changes in crude oil costs. Since 2002, Honolulu's average price for regular gasoline has generally risen when crude oil costs rose, but remained flat when crude oil costs dropped.

Hawai'i's historically high gasoline prices have been blamed on a lack of wholesale competition, geographic isolation and high gasoline taxes.

Whether price caps are the answer to Hawai'i's high prices remains to be seen. However, because of a major spike in Mainland gasoline prices the PUC has calculated the wholesale cap for regular unleaded on O'ahu tomorrow (if the caps were in effect) would be $2.27, or $2.85 a gallon, including taxes.

If wholesalers charge the maximum $2.85 and retailers keep an estimated 12 cent per gallon markup, prices could approach $3 a gallon. If the price caps push up prices, they should be suspended, said Rep. Brian Schatz, D-25th (Makiki, Tantalus).

"The point of this was to lower gas prices," he said. "If it doesn't do that, the law should be suspended immediately.

"If the point wasn't to make gas prices more affordable, what was the point?"

If price caps don't work, "I think people will appreciate the fact that it's better to have tried and failed than not to have tried and allowed the oil companies to gouge consumers," said House Majority Leader Marcus Oshiro, D-39th (Wahiawa). "The community knows that we are trying to address high gas prices."

Events leading to New law

October 1998: Seeking $500 million in damages, the state files a lawsuit accusing divisions of Chevron, Shell, Texaco, Unocal, Tesoro and Tosco of fixing gas prices and overcharging consumers. All the companies denied the charges.

November 1999: Tesoro Hawaii Corp., its parent company and BHP Hawaii Inc. agree to pay the state $15 million to settle the antitrust lawsuit.

March 2002: The remaining companies in the lawsuit agree to settle with the state for $20 million, marking the end of legal battle.

May 2002: The legislature passes a law that caps retail gasoline prices, but delays implementation until 2004.

September 2003: A state-funded report on price caps warns the law could lead to higher prices and shortages.

May 2004: Lawmakers modify Hawai'i's gasoline price-cap law by capping only wholesale prices. Implementation is delayed until Sept. 1, 2005.

August 2005: The state Public Utilities Commission discloses the formula that will be used to cap wholesale gasoline prices.

Sept. 1, 2005: Hawai'i is scheduled to become the only state to regulate gasoline prices.

Details of law on Price caps

Question: What is the gas cap?

Answer: The law sets a maximum wholesale price for regular, mid-grade and premium gasoline sales on O'ahu, the Big Island, Kaua'i, Maui, Lana'i and Moloka'i.

Q: How will the cap affect the price I pay at the pump?

A: The law does not cap retail sales so there's no guarantee that lower wholesale prices would be passed on to consumers. The wholesale price cap is based on Mainland prices. At times when Mainland prices are high, such as now, the cap could lead to higher prices. If Mainland prices go down, the cap could bring down prices in Hawai'i.

Q: How long will the cap be in effect?

A: The law will stay in effect unless Gov. Linda Lingle suspends it. If she does suspend the law, it would remain suspended at least until the next legislative session.

Q: Why was the law passed?

A: Democratic lawmakers passed the caps amid perceptions that Hawai'i prices are too high and don't closely reflect changes in crude oil costs. The law was passed after the state unsuccessfully sued oil companies alleging the fixing of gas prices.

Reach Sean Hao at shao@honoluluadvertiser.com.